Last night, I took my husband (part of his birthday present) to see The Illusionists, a touring Broadway production featuring seven masters of illusion doing a three-night run in Knoxville this week.  I admit to a fascination for magic shows and the like, an interest my husband shares.  I really enjoyed the production and recommend it to those with similar interests.

At the show last night, however, something unusual happened.   I ended up in the show.  I made an egg reappear and had my watch pilfered by one of the illusionists.  It was pretty cool.  After the show, I got kudos for my performance in the ladies room, on the street, and in the local gelato place.

But I admit that as I thought about the way I had been tricked–by sleight of hand–into performing for the audience and allowing my watch to be taken, I realized that these illusionists have something in common with Ponzi schemers and the like–each finds a patsy who can believe and suckers that person into parting with something of value based on that belief.  That's precisely what I wanted to blog about today anyway–scammers.  Life has a funny way of making these kinds of connections . . . .

So, I am briefly posting today about a type of affinity fraud that really troubles me–affinity fraud in which a lawyer defrauds a client.  Most of us who teach business law have had to teach, in Business Associations or a course on professional responsibility, cases involving lawyers who, e.g., abscond with client funds or deceive clients out of money or property.  I always find that these cases provide important, if difficult, teaching moments: I want the students to understand the applicable law of the case, but I also want them to understand the gravity of the situation when a lawyer breaches that all-important bond of trust with a client.

I recently was informed about a local case of this kind that truly troubles me.  A lawyer who had a long-standing relationship with a client (the client now in his mid-eighties) offers the client the opportunity to "invest" in a scheme in which stolen money from another country is laundered and exported to the United States.  The client is promised, of course, a spectacular return.  But he trusts the lawyer, with whom he has worked over many years (which, of course, enables the lawyer to know the client well, including in a psychological and financial sense).  As a result, the octogenarian writes a substantial number of checks over time to the lawyer, who proceeds to farm the money out to others involved in the scam, presumably to later return, at least in part, to the lawyer himself.  The client never sees the return he was promised.

I became interested in this case because of the potential for a Tennessee state securities law claim on these facts.  In my view, the facts involve a classic investment contract under T.C.A. Section 48-1-102(17)(A). The client was putting money into a scheme to make profits from the efforts of others. In Tennessee, these kinds of investments are defined (as in most, if not all, states) in decisional law. The leading case is King v. Pope, 91 S.W.3d 314 (Tenn. 2002), which reaffirms Tennessee's use of the Hawaii Market test defining an investment contract.  Specifically the King case provides that an investment contract exists when:

(1) An offeree furnishes initial value to an offeror, and (2) a portion of this initial value is subjected to the risks of the enterprise, and (3) the furnishing of the initial value is induced by the offeror's promises or representations which give rise to a reasonable understanding that a valuable benefit of some kind, over and above the initial value, will accrue to the offeree as a result of the operation of the enterprise, and (4) the offeree does not receive the right to exercise practical and actual control over the managerial decisions of the enterprise.

King, 91 S.W.3d at 321.  As you may recognize (or know, if you teach this subject matter), this test is more lenient than the federal test for a security under S.E.C. v. W. J. Howey Co., 328 U.S. 293 (1946).  Although T.C.A. Section 48-1-102(17)(B) includes an exception from the definition of a security for "currency," that should be inapplicable here.  The client was investing in a scheme involving currency, but he was not investing in currency.

Bottom line:  These facts represent a far-too-familiar pattern of swindling that occurs in situations in which there is a relationship of trust and confidence.  They also represent a truly reprehensible breach of fiduciary duty on the part of the lawyer-scammer.  Although I have not fully thought this through, it may be interesting to do a study on this kind of case–attorney/client affinity fraud.  Do you agree?  What objectives of that study might interest you?  Let me know in the comments here or by emailing me.  I would like to take these bad facts and make good scholarship, if possible.